Consumer Cyclicals, Industrials Are Among Standout Mid-cap ETFs

Exchange-traded funds focusing on consumer cyclicals and industrials are among the best-performing mid-cap ETFs in a year where large caps dominate the market.

While the Standard & Poor’s 500 stock index is up 9.10 percent, mid caps lag, no matter which index is used. The S&P 400 Midcap is up a paltry 1.7 percent, although the Russell Midcap is up 6.5 percent.

Sean O’Hara, president of Pacer ETFs Distributors, says the large-cap outperformance versus mid caps comes strictly because of a few technology securities.

“The top 10 names that have dominated the S&P 500 have dominated the returns. Unless you have big allocations to those kinds of names, you’ve underperformed this year,” he says, referring to names like Facebook, Apple, Amazon, Netflix and Google.

This year notwithstanding, O’Hara says mid caps usually outperform both large and small caps, He says reviewing data over the last 20 years, the average mid-cap returns were 9.55 percent, while the average return on large caps was 7.32 percent and the average return on small caps was 9.35 percent.

He says if Washington can get going on tax reform and regulatory reform, mid caps could return to their outperformance. Unlike large-cap companies that can hire professionals to shield them from high taxes or some regulatory burden, mid-cap companies generally can’t do that.

“If you tell me what’s going to happen on tax reform and regulatory reform, I would tell you they’re probably better poised to benefit from that because the burden of the regulatory reform impacts a company that isn’t as big,” he says.

The best-performing mid-cap ETF so far this year is the iShares U.S. Home Construction ETF (ITB), up 21.56 percent. As its name implies, it tracks U.S. equities in the home construction sector, in this case, the Dow Jones U.S. Select Home Construction Index. It has $1.4 billion in assets under management and has an expense ratio of 44 basis points.

Strong demand for housing has helped this fund outperform, although there could be signs of this sector weakening, such as weak August housing starts data, rapidly accelerating home costs and rising interest rates. Consumer cyclicals make up 77.73 percent of the fund, with D R Horton, Lennar and NVR in the fund’s top three holdings.

A niche fund, First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), is up 5.63 percent year-to-date. It follows the StrataQuant Industrials Index, which ranks certain stocks of the Russell 1000 index. It has a 66-basis point expense ratio and $1.3 billion in AUM. Its top three sectors are machinery at 21.52 percent, aerospace and defense at 15.47 percent, and airlines at 13 percent.